ABOUT SEAN STANNARD-STOCKTON

Sean Stannard-Stockton is the president and chief investment officer of Ensemble Capital Management, located in Burlingame, CA, midway between San Francisco and Silicon Valley. From 2006 through 2012, Sean authored the Tactical Philanthropy blog and wrote regular philanthropy columns for both the Financial Times and the Chronicle of Philanthropy. In 2012, Sean officially ended the blog to focus on growing Ensemble Capital.

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Investors vs. Donors

February 27, 2008 – 8:30 am

I have some questions and would love your feedback.

Why do investors take credit for picking great investments (“look how smart I am, I bought XYZ stock!”), while philanthropists, especially foundations, claim that the credit goes to the nonprofits they fund (“the grantee did all the work”).

Why is it acceptable for investors to talk about investments they think are bad (“Don’t buy ABC stock, their management is terrible!”), while philanthropists never badmouth nonprofits, even if they think they are ineffective?

Related to #2: Why do public companies generally ignore all the talking heads who say negative things about them, while nonprofits find it intolerable to have a prominent person speak negatively about them in public?

If you’ve read this blog for awhile, you probably think these are leading questions and that I have a firm bias about which approach is better. But I’m truly asking these questions with an open mind. Recently I met with the director of philanthropy-focused grantmaking at a large foundation. I brought up the idea that publicly talking negatively about ineffective nonprofits (especially those that the foundation thought were not “fixable”, say because management was incompetent) would produce a positive social impact by directing other donors’ funds away from the bad nonprofit and towards more effective competitors. She told me that it was a primary value of the foundation to not harm grantees.

I think that is a very compelling counter argument and I’m interested in how readers view my three questions above and the idea that not harming grantees means never saying anything negative about a nonprofit.

9 Comments

Wonderful questions, Sean! Personally, I have a hard time reconciling the contradiction of all the hard work, time, energy, etc that program staff put in for the up-front due diligence in reviewing a proposal and then, if they find that the organization’s project isn’t one that the program staff and trustees decide to grant because of the information discovered in the due diligence process, the decision and background information informing the decision isn’t shared. When it is a corporate entity, people always advocate for openness and the opportunity for the public to say both good and bad things so that the company will publicly explain why and how for their good and bad press. But with nonprofits, and grantmaking, it’s a closed circuit. I know that foundations don’t want to hurt the grantees, but wouldn’t it be better to publicly identify where there are “flaws” so that other organizations in the same field could partner with them so that strengths from one org could benefit another and from the other org supporting back in return; so other funders could share in the due diligence already performed and know how to more effectively help and/or fund that organization based on the issues they are having; and so those in the community being served/identified by that organization can know if it is in financial or other trouble and how that could effect them?

Great questions, as always. The clear sense I have received from many foundation presidents and program officers is that they do indeed talk about the nonprofits they do and don’t fund, among their peers. They clearly do talk, they just don’t share their perceptions with the broader public. So I interpreted your question to be why don’t foundations share their positive and negative perceptions outside of their private conversations. One reason might be not wanting to harm grantees, as the program officer you interviewed mentioned. Another reason may be that they don’t want to publicly stand behind what they say in private, or more likely, don’t want to put their foundation “on record” for their views; they may not feel they would have the foundation’s support if there is a backlash, and also, just imagine trying to work through a foundation’s governance and communications channels to get approval for making those kinds of statements.

There should be ways to make this information more available, though, starting with small steps – enable funders to share their views more broadly within the field (widen the circle of the “in the family” conversations), bring serious private individual donors into those conversations, report not just grants made, but perhaps grants denied; and more.

1. Philathropy in our society is frowned upon if it is considered self-serving. Therefore, to boast about one’s wise philanthropic investment “picks” would be, well, boastful and self-serving.

2. Donors and institutional funders have two different reasons for not spreading “the bad news.”

Donors don’t do it because they do not want to insult, offend, or upset board directors and executives who may be their neighbors, friends or business associates whom they have to face. Why would a donor risk PO’ing a group of people in order to “save” the greater community of the faceless from making an unwise donation.

Foundation’s don’t do it because it doesn’t jive with the essential philanthropic resolve –the world can and will be a better place, and even poorly-performing charities hold the promise of getting better if they are not buried first.

Also, as foundations routinely deny grants for a host of reasons, publicly showing cause in some cases and not in others would cast doubt on ALL denied grantees — not to mention creating a whole lot more work for foundation staffs.

In both cases, there is also the question of criteria — my criteria of a ‘poor philanthropic investment opportunity’ may be very different from that of another.

As Pete pointed out, funders share info about the bad eggs among themselves, and so do donors.

As for your question No. 3, it’s all about the numbers. Corporations are more concerned about their shareholders than about the pundits. They know that the pundits have a limited reach and sphere of influence.

Nonprofits, at any trace of criticism, feel it immediately in their coffers. They need to get a face out in the public to assure, reassure, and appeal for the public’s trust and dollars.

Great question, Sean. It’s so “nice” that you give us reason to think on these important questions! 😉

To emphasize Renata’s point further: grant denials aren’t necessarily criticism. Foundations deny grants for a number of reasons. One of the most common is the proposal doesn’t meet our guidelines or that staff and board deem it a weak fit with our strategy/goals. That has little to do with the nonprofit, so publishing that information doesn’t really constitute criticism of the nonprofit (although it might invite a critique of the foundation). The kind of criticism Sean’s post seems directed at is when grants are denied because of something important about the nonprofit: its management or finances are troubled, its impact is judged to be not significant, etc. Foundations, as Pete notes, do talk about those issues among themselves.

I have a few thoughts on why foundations are reluctant to expand that conversation:

– It starts with the lack of a consensus about what data and means to use for evaluating nonprofit. Arguments for or against a grant/nonprofit are based on limited objective evidence. It makes the situation very personal and very subjective fast (as Renata noted).

– Foundations might damage relationships with all their grantees if they start publicly criticizing those that encounter problems. My colleagues and I want our grantees to come to us with problems and challenges; if they don’t, we can’t help them (and we also can’t do any damage control with our own board if things are really getting rough). Foundations have a hard time building honest and open relationships with nonprofits because of the power dynamics. If you become the foundation that might “out” a struggling grantee and hurt or kill their fundraising, you stand to lose that trust. Now you’ve got grantees covering up problems. That makes it harder to be a good grantmaker. It’s also scary – foundation staffers worry about backing a grantee to their board that ends up on the front-page of the newspaper for its problems.

So criticism of grantees potentially hurts a lot of grantee/funder relationships, which makes a foundation staffer’s job harder both in terms of supporting their grantees and being responsible to their board.

– A lot of nonprofits are fighting an uphill battle and doing it with the best intentions. They are under-capitalized, the staff are underpaid and overworked, and they are trying to serve the public. Criticizing them in public can feel like kicking a dog when it’s down, even if the results would be a more effective sector in the long run. You’ve already denied funding, which hurts. It’s hard to then advocate that others should deny funding too when you know these people mean well, face tough circumstances, and are probably meeting a need for some community members. Even if you think it’s not fixable, do you really want to tell a well-meaning staff that its efforts are not worth it and then turn to the people they are serving and say they should look elsewhere?

So it’s partly that you don’t want to hurt your grantee and the people they serve, partly it’s that hurting a needy group is unpleasant, and partly it’s recognizing that failing in the nonprofit world isn’t always your fault.

I think Sean’s first question, then, is the most interesting. Foundations and donors actually don’t do enough to tout their successes and to make a strong, public case championing the relative effectiveness and strength of their best grantees. It’s not just that the grantees did all the work; it’s that we talk only about how our grantees do good things and yours do too. I think it would be way easier to get the ball rolling towards more criticism if it started from a place of making a case for the best social investments rather than highlighting the worst.

I will be short and to the point:
1. Why do investors take credit for picking great investments (”look how smart I am, I bought XYZ stock!”)…because they have something to sell!

While philanthropists, especially foundations, claim that the credit goes to the nonprofits they fund (”the grantee did all the work”). I whole heartedly concur with Renata… we are not self-serving.

2.Why is it acceptable for investors to talk about investments they think are bad (”Don’t buy ABC stock, their management is terrible!”)… because their marketplace is competitive.

While philanthropists never badmouth nonprofits, even if they think they are ineffective? Who told you they don’t? They do internally and I am certain info is shared among circles. My FAVORITE WORD MOKITA -a New Guinea word for “the truth that everyone knows but speaks nothing of.”

Related to #2: Why do public companies generally ignore all the talking heads who say negative things about them? A sign of weakness in the marketplace. Most likely taken to heart behind closed doors.

While nonprofits find it intolerable to have a prominent person speak negatively about them in public? Again, Renata says it better than I could and I agree completely.

As noted, foundations DO talk about crappy nonprofits all of the time. It is part of in the old due diligence handbook that you have buried next to that bottle of Jack Daniels in your desk.

Foundations, if they do their work well, also talk pretty frankly with other nonprofit organizations.

Got NPO gossip? The nonprofit community LOVES to dish about their peers, their competitors, their collaborators and non-collaborators.

And those of us who suffered through a typical philanthropy conference find that the syrupy self-congratulatory vibe is filled with funders/donors patting themselves on the back about their latest and greatest investments, discoveries, and grassroots heroes of the day.

A philanthropy intern I met at a philantro-hugfest elbowed me and remarked, “Dude, so they wrote the check to an organization that was already kicking butt? How come they get all the props and act like they did something big?”

And how are the tedious annual reports of funders much different that the usual investment porn we get in the mail? Leadership! Innovation! Results! Same crap. Smaller production budget. Yawn.

And don’t get me going on foundation produced DVD’s that go all Ed Burns on their own sepia-toned history of supporting innovation and zzzzzzzzzzzzzzzz. (You yourself have some in your in-box that you have not bothered to watch.)

The self-congratulatory imperative in the profession is a parody of itself.

Nonprofits have to laugh when they are its victims.

What nonprofit has not been showcased by a funder in one year only to be denied funding in the next year?

What nonprofit leader has not been “dog-and-ponied” by funders only to get the shaft after the banquet is over?

And we all know how foundations wind-down funding initiatives. They through a big “Me, Me, Me” event, convening whatever touting their achievements and then pull the plug on the cash to an entire sector.

While there may be some culture of being nice, I think the problems here might relate to your other posts about measuring effectiveness of nonprofits. If the outcomes of a nonprofit are not quantifiable and not easy to compare within a sector, then since you don’t know their effectiveness it is difficult: 1) to feel smart about the pick, 2) to badmouth them without valid data, or 3) for a nonprofit to defend themselves.

A public company has their results published regularly, and the stock price is (arguably) a measure of success. Unless the nonprofit is measurable, it has limited data to support any conclusion on either side.